Question

If a worker's current wage is a reference point, according to Prospect Theory a wage cut will have a greater impact on the worker's utility than a wage increase.

ture or false

Answer 1

As we know as per Prospect Theory individual weighs equal amount of gains and loss from a certain reference point in different manner.

In simple terms people derive more pain on losing a certain value than having you on gaining the same value.

Hence, Considering the current wage rate as refer point for a worker. If we cut the wage of worker say by 'c' he will have a drop in utility 'u' and in other case If we increase his wage by 'c' he will have a gain in utility 'u*'

So, As per Prospect Theory we must have u > u*

So, Worker will be more dissatisfied when his wage falls by same amount in comparison to him getting joy when his wage increases by same amount.

Now,

The above statement says wage cut will have a greater impact on the worker's utility than a wage increase is absolutely correct as per Prospect Theory.

Hence, TRUE